International Tax Depreciation for Foreign Assets: ADS and GILTI

Under U.S. tax law, international tax depreciation rules for foreign assets require that any tangible property used predominantly outside the United States be depreciated under the Alternative Depreciation System (ADS). That means straight-line depreciation over longer recovery periods than domestic property, with no bonus depreciation and no Section 179 expensing. The rule is mandatory, not elective, and it applies whether you own the asset directly or through a foreign entity.

When ADS Applies to Foreign-Use Property

Section 168(g) of the Internal Revenue Code requires ADS for tangible property “used predominantly outside the United States” during the taxable year.¹ The IRS reads “predominantly” as more than 50 percent of the time. Buildings and permanently installed equipment are easy to test since they sit in one place. Vehicles, machinery, and tools that move between countries need day counts showing where the asset was physically located.

The test runs each tax year, not once at acquisition. Property that starts domestic and later moves overseas shifts from regular MACRS to ADS mid-life, and property that returns to primarily domestic use can shift back. Every transition forces a recalculation going forward, which is why mobile assets demand careful location records.

ADS Recovery Periods

ADS differs from the Modified Accelerated Cost Recovery System (MACRS) in two ways. It requires the straight-line method, spreading cost evenly across the recovery period instead of front-loading early years. And its recovery periods are generally longer. A machine that would be fully depreciated in five or seven years under MACRS can take 12 years or more under ADS.¹

Section 168(g)(2)(C) sets the recovery period by asset class:¹

Property with an assigned class life uses that class life as its recovery period. Class lives appear in IRS Revenue Procedure 87-56 and are reproduced in Publication 946.
Personal property with no class life: 12 years.
Residential rental property: 30 years. The Tax Cuts and Jobs Act shortened this from 40 years for property placed in service after December 31, 2017.
Nonresidential real property: 40 years.
Railroad grading, tunnel bore, or water utility property: 50 years.

The 30-versus-40-year split for real property matters. A foreign rental apartment building runs on a 30-year schedule; a foreign office building or warehouse runs 40. Misclassifying the property type means claiming the wrong deduction every year for decades.

No Bonus Depreciation or Section 179

This is the largest dollar consequence of holding depreciable property abroad. Domestic businesses placing equipment in service in 2026 can generally claim 100 percent bonus depreciation, writing off the full cost in year one.² Foreign-use property gets none of that. Bonus depreciation under Section 168(k) applies only to property depreciated under regular MACRS, and since ADS is required for foreign-use property, it is automatically excluded.

Section 179 works the same way. Property that must use ADS does not qualify for the immediate expensing election. A $500,000 machine placed in service at a domestic plant can be fully deducted in 2026; the same machine at a foreign plant generates roughly $41,667 per year over 12 years. The timing gap moves real money.

Exceptions That Keep MACRS Treatment

Not every asset that crosses a border loses MACRS treatment. Section 168(g)(4) preserves domestic depreciation for several categories even when the property is used abroad:¹

Aircraft registered with the FAA and operated to and from the United States, or operated under a U.S. government contract.
Railroad rolling stock used domestically and internationally by a domestic rail carrier, as long as it is not leased to foreign persons for more than 12 months in any 24-month period.
Vessels documented under U.S. law and operated in foreign or domestic commerce.
Motor vehicles owned by a U.S. person and operated to and from the United States.
Shipping containers owned by a U.S. person and used to transport property to and from the United States.
Outer Continental Shelf property used for exploring, developing, or transporting resources from the shelf.
Property owned by a domestic corporation or U.S. citizen and used predominantly in a U.S. possession.
Specific communications satellites and submarine cables owned by U.S. persons or domestic corporations.

Each of these keeps a meaningful connection to U.S. operations. If your asset fits one of the categories, you continue on regular MACRS with its shorter periods and accelerated methods. Miscategorizing an exempt asset as foreign-use property means years of unnecessarily slow depreciation.

Which Convention Applies

ADS uses the same conventions as regular MACRS under Section 168(d).¹ The convention sets how much depreciation you take in the first and last years:

Mid-month convention for residential rental property and nonresidential real property. The asset is treated as placed in service at the midpoint of the month, so the first-year deduction is a half-month for the month of placement.³
Half-year convention as the default for personal property. The asset is treated as placed in service at the midpoint of the year, and the first-year deduction is half of a full year’s amount.³
Mid-quarter convention replaces the half-year rule if more than 40 percent of the total cost of personal property placed in service during the year was placed in service in the last three months. Each asset is then treated as placed in service at the midpoint of the quarter it was acquired.³

Check the 40 percent threshold before defaulting to half-year. The convention drives every year’s calculation, not just the first.

Converting Foreign Currency to Dollars

Returns are filed in dollars, so a foreign asset’s cost must be translated. The general approach is to convert the original purchase price at the exchange rate in effect when the property was placed in service. Later years of depreciation are typically translated using the historical average exchange rate from the acquisition year, which keeps the dollar deduction stable rather than fluctuating with current rates.

Treasury’s Bureau of the Fiscal Service publishes official reporting exchange rates that serve as the standard federal reference.⁴ For businesses operating a qualified business unit with a functional currency other than the dollar, Section 987 of the Internal Revenue Code governs how gains and losses from currency translation are recognized. Currency translation combined with depreciation can produce phantom gains or losses unrelated to the asset’s productivity, so keeping records of the conversion rates used at acquisition is worth the effort.

How Foreign Depreciation Affects GILTI

If the property sits inside a controlled foreign corporation (CFC), depreciation feeds directly into the Global Intangible Low-Taxed Income calculation. GILTI is essentially the excess of a CFC’s tested income over a 10 percent return on its tangible depreciable property. That tangible property component is called qualified business asset investment (QBAI).⁵

QBAI is the average adjusted basis of the CFC’s depreciable tangible property at the end of each quarter, measured using ADS depreciation. Higher QBAI means a larger deemed tangible income return, which reduces the GILTI inclusion. As property depreciates under ADS and its adjusted basis falls, QBAI shrinks and the GILTI inclusion grows. For property placed in service before December 22, 2017, the regulations require recalculating adjusted basis as if ADS had applied from the original placed-in-service date.⁶

When a CFC buys new tangible property, QBAI rises and the shareholder’s GILTI bill can drop. An anti-abuse rule disregards property acquired temporarily with a principal purpose of inflating QBAI. Property held less than 12 months is presumed temporary unless the taxpayer can show the disposition was not contemplated at acquisition.⁵

Reporting on Your Tax Return

Depreciation goes on Form 4562. Part III, Section C (Lines 20a through 20e) is the section for ADS property. You enter the basis, recovery period, convention, and straight-line designation.⁷ Individuals attach Form 4562 to Form 1040; corporations attach it to Form 1120.⁸

Property held through a CFC gets reported on Form 5471. The depreciation flows through the CFC’s income and deduction schedules and affects the GILTI and Subpart F figures passed to the U.S. shareholder.⁹ Property held through a foreign disregarded entity or foreign branch is reported on Form 8858 instead.¹⁰

If the IRS questions a foreign asset deduction, you will need purchase receipts, currency conversion documentation, and records showing how many days the property spent in each country. That documentation is far easier to keep from the start than to reconstruct during an audit.

1
Office of the Law Revision Counsel. 26 U.S.C. 168 – Accelerated cost recovery system
2
Office of the Law Revision Counsel. 26 U.S. Code 168 – Accelerated cost recovery system
3
Internal Revenue Service. Publication 946 – How To Depreciate Property
4
Bureau of the Fiscal Service. Treasury Reporting Rates of Exchange
5
Internal Revenue Service. Concepts of Global Intangible Low-Taxed Income Under IRC 951A
6
eCFR. 26 CFR 1.951A-3 – Qualified business asset investment
7
Internal Revenue Service. Form 4562 – Depreciation and Amortization
8
Internal Revenue Service. Instructions for Form 4562 (2025)
9
Internal Revenue Service. About Form 5471, Information Return of U.S. Persons With Respect To Certain Foreign Corporations
10
Internal Revenue Service. About Form 8858, Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)